Canary Wharf's rents are tumbling, about 15 per cent of its office space is vacant, some of its tenants have deals letting them give back space without paying penalties, and its asset value is falling sharply. Why, then, should three bidders be jostling to lodge bids for the property group?

The answer goes to the heart of Canary Wharf and its history: vision. Morgan Stanley, whose Real Estate Fund kicked off the bidding process when it approached the company in June, Goldman Sach's Whitehall property fund, and the Canadian property group Brascan, which owns 9 per cent of its shares, are not thinking about how Canary Wharf looks now.

The indicative bids, which must be lodged by Thursday, will be driven by their vision - of how Canary Wharf will come to look when the economic recovery has not only filled the offices but perhaps made it viable to develop the 4 million-plus square feet around the complex, the potential for sizable gains.

Canary Wharf, whose towers now dominate the east London landscape, has always needed that kind of vision. Most property developers thought that Paul Reichmann was insane when he bought into the project to build a financial centre on a tonsil of land jutting into the Thames. For years, it looked as if the critics would be vindicated. While the buildings did rise from the wasteland, their completion coincided with the sharpest slump in the property market since the 1970s. Prospective tenants and backers cooled, the transport links essential to the site's viability were dogged by delays and overruns, and the financing became crippling.

In 1992, Reichmann's development company, Olympia & York, collapsed into administration with debts of more than £8 billion, making it the biggest casualty of the property slump.

Three years later, alongside a recovery in the property market, Reichmann bought back the business, for £800 million. This time, his vision gained ground: a steady stream of big City names, from Morgan Stanley and Clifford Chance, to the Financial Services Authority, transferred their staff to Canary Wharf.

In 1999, the renaissance was confirmed when the company floated, with a value of £2.2 billion, just as the Jubilee Line tube extension opened.

After four more years and a savage bull market, the vision is clouded again. There has been concern about rents and vacancies in the City, but the real catalyst for Canary Wharf's troubles was its admission in March that four of its tenants had the option to give back, with no penalty, almost 700,000 sq ft of space.

That confirmed what many in the property industry had long believed: that the Wharf's success owed as much to smoke and mirrors as to Reichmann's vision and expertise. The group rarely used agents, preferring to negotiate with tenants directly. And that has meant that only the Wharf's own executives have really known what kind of inducements have helped secure the high-profile signings (investors are worried that the four revealed in March are just the start of the bad news).

The three bidders scouring Canary Wharf's books will be searching for other such deals, no doubt. But that is just one of the 'X factors' - as dubbed by one of the prospective bidders - making the bids trickier than usual. Other X factors relate to taxation.

Canary Wharf has accumulated significant tax losses, which could help to shelter future profits, and it is believed to have significant unused Enterprise Allowances arising from the days when the Docklands site was languishing as urban wasteland. Finally, the bidders will be taking account of the potential capital gains tax bill if the properties are later sold.

The value of these tax breaks and tax charges is hard to calculate: it depends on the Inland Revenue. Complicating the bidders' calculations further, Canary Wharf says it is reviewing its own estimate of its capital gains tax liability.

But the biggest X factors in the bid are Reichmann and the long-term prospects for his development. Will his 'new city' endure now that the raging bull market which helped it grow has turned into a savage market downturn? Or will its hard-won tenants hotfoot it back to the Square Mile as soon as they can offload their leases?

Reichmann is making no public comment about his plans.But he is talking to the bidders and how he decides to vote, with his 8 per cent stake, will be crucial to the outcome. Earlier suggestions that he and his chief executive, George Lacobescu, were planning a management buyout, have proved unfounded.

All three bidders have made clear they will work with the existing management. That makes sense. 'It is a very complex estate to run. There is the leasing, building management, securitisations. You need a very experienced person to handle all these,' said an insider.

Some suggest Reichmann is keen to make the company private, being tired of the scrutiny that a public quote entails. Others say he wants to bank some of the profits on the development; his stake is worth more than £100 million. Few believe he will bow out completely, despite his 73rd birthday next month.

Long-term, however, the success or failure of Canary Wharf will depend not on Reichmann but on the development talents of whoever acquires it.

Many are sceptical. One analyst says that if the incentives used to attract tenants are included in the accounts, the Wharf is 'not making money' and is not a success. Transport links are over-stretched; further development would make them unbearable. And if economic rents are charged, tenants could return to the City; once the bidders realise this, they may walk away, sending the Wharf's shares into a downward spiral.

Others disagree. 'If you buy with a view to a 10-year development cycle, you do see value there. There's a lot of evidence that the east of London property market will develop ... so there will be an increasing desire for companies to relocate there,' said one bidder.

Reichmann believed that 15 years ago. The challenge now is to make money from these tenants. That could be the hardest part of all.

Gulf banks target UK

Middle East investors are shifting their attention from the US to Britain and Europe following the 11 September attacks and the Iraq war.

Property assets have been particularly popular, according to consultants DTZ, which calculates that Middle East investors spent £1.1 billion in the UK last year, up from £827 million the year before. Investment has been running at similar levels this year.

DTZ's Nick West says that while investors do not appear to be withdrawing money from the US, new investment is being diverted to Europe. 'There has also been a re-allocation of money from equities and into property because the return on equities has been so poor.'

Among the active investors are the Kuwait Finance House, which has just launched the £250 million Almannar fund in Britain, the Gulf Finance House and Norriba bank. Almannar has just acquired four properties from Hermes, while Norriba bought the former Enterprise Oil headquarters, Grand Buildings, for £140 million. West says that many of the deals have been outside London, where returns are higher.

Many investors from the region also invest on the Islamic shari'a principle, which means they cannot earn their returns from interest on lending money. That makes it hard for them to invest in City offices but retail remains popular.

'In some parts of the market, they are the only active players,' says West.